United States v. Chanu
| Decision Date | 06 July 2022 |
| Docket Number | 21-2242, 21-2251, 21-2666 |
| Citation | 40 F.4th 528 |
| Parties | UNITED STATES of America, Plaintiff-Appellee, v. Cedric CHANU and James Vorley, Defendants-Appellants. |
| Court | U.S. Court of Appeals — Seventh Circuit |
Jeremy Raymond Sanders, Attorney, Department of Justice, Criminal Division, Fraud Section, Washington, DC, William A. Glaser, Attorney, Department of Justice, Criminal Division, Washington, DC, for Plaintiff Appellee in 21-2242.
Laura G. Hoey, Attorney, Ropes & Gray LLP, Chicago, IL, Katherine M. McDonald, Attorney, Ropes & Gray, Boston, MA, Michael G. McGovern, Attorney, Helen Gugel, Attorney, Ropes & Gray LLP, New York, NY, for Defendant-Appellant in 21-2242.
Roger A. Burlingame, Attorney, Dechert LLP, London, Christopher S. Burrichter, Attorney, Dechert LLP, Chicago, IL, Matthew L. Mazur, Attorney, Dechert LLP, New York, NY, for Defendant-Appellant in 21-2251 and 21-2666.
William A. Glaser, Attorney, Department of Justice, Criminal Division, Washington, DC, Jeremy Raymond Sanders, Attorney, Department of Justice, Criminal Division, Fraud Section, Washington, DC, for Plaintiff-Appellee in 21-2666.
Before Flaum, St. Eve, and Jackson-Akiwumi, Circuit Judges.
This appeal presents several questions, including whether placing manual "spoofing" orders—here, precious metals orders that two traders, defendants-appellants James Vorley and Cedric Chanu, intended to withdraw before being filled—can amount to wire fraud. We address this question, as well as three issues stemming from the trial.
For the following reasons, we affirm the district court's judgment.
Deutsche Bank—a global banking and financial services company—employed Chanu and Vorley as precious metals traders. Vorley traded precious metals futures contracts from May 2007 through March 2015 while based in London. Chanu was similarly a precious metals futures contract trader from March 2008 through May 2011 in London and from May 2011 through December 2013 in Singapore.
A futures contract is a legally binding agreement to buy or sell a particular product or financial instrument at an agreed-upon price on an agreed-upon date in the future. Futures contracts are traded on markets designated and regulated by the United States Commodity Futures Trading Commission ("CFTC"). One such commodities marketplace, the CME Group, Inc., consists of four exchanges—including the New York Mercantile Exchange, where palladium futures contracts trade, and the Commodity Exchange, Inc. ("COMEX"), where gold and silver futures contracts trade. CME Group exchanges use an electronic trading platform known as Globex to trade futures contracts from anywhere in the globe. During the time relevant to this appeal, the CME Group operated Globex using trading engines in Illinois.
Traders using Globex place "bids" to buy or "offers" to sell futures contracts at a specified price or level. Between 2008 and 2013, the Globex system permitted traders to obscure certain information about their trades. Instead of displaying all orders resting on Globex, as the system does now, the "order book" at this time displayed only a subset of bids and offers—the "best ten bids and best ten price levels up and down." Given this presentation, not all trade details were readily discernable from Globex; a trader could, for example, obscure the full size of his or her intended trade order by placing an "iceberg" order—which shows only a preset fraction of the total intended trade order—to mitigate market movement and detrimental price impacts. Illustrating this concept, if a trader intends to buy a thousand contracts, he or she may elect to show only one hundred at a time; once the first hundred contracts are filled, the next one hundred contracts become visible to other traders, until the full order quantity is filled.
Visible orders impact the market by conveying investors' "intent to participate" in the market at a particular price; these orders also "communicat[e] something about the liquidity in the market." Iceberg orders were a permissible way of minimizing market movement in light of the fact that larger buy orders correlated to larger price responses in the financial market.1 In the words of the government's expert,
COMEX traders could also cancel an order, or the unfilled portion of an order, at any time before it was filled. But, generally speaking, the CME rules do not permit deception; consequently, traders are prohibited from placing orders that they intend to cancel before execution. Furthermore, traders at Deutsche Bank, including Chanu and Vorley, received training from Deutsche Bank's compliance department in 2009 explaining that "market manipulation" was prohibited.2 Deutsche Bank took the position that "[t]rading should never be designed to give a false or misleading impression as to the supply or demand" and "[t]rades should never be executed at abnormal or artificial levels."
Turning to the conduct underpinning this criminal case, Chanu and Vorley placed orders for precious metals futures contracts on one side of the market that, at the time the orders were placed, they intended to cancel prior to execution. The government alleged that Chanu and Vorley placed such orders with the intent "to create and communicate false and misleading information regarding supply or demand (i.e. , orders they did not intend to execute) in order to deceive other traders" and entice them to react to the false and misleading increase in supply or demand. As noted above, at all times relevant to this case, CME rules prohibited such conduct.
Specifically at issue was Chanu and Vorley's manual "spoofing" conduct, which involved placing "fake bids and offers" to "trick other market participants." Chanu and Vorley's trading colleague, David Liew, who testified against them at trial pursuant to a plea agreement, explained how manual spoofing worked: In an effort to buy something at the lowest possible price, that trader may use spoofing. Spoofing entails "plac[ing] orders opposite of [the] buy order ... [with the] intent to have those offers deceive other market participants into thinking that there was more selling than there actually was and so hoping to get a better price on [the] original order." In Liew's words, a spoofing trader tries "to signal that [certain] trades would go through, but [the trader's] intent is actually to cancel them shortly after." Liew testified that, if successful, employing this illusion "would help Deutsche Bank" while "hurt[ing] any other market participants."
Of note, there are times when a trader may "cancel an order for totally legitimate reasons." A client may change their wishes or breaking news may "cause[ ] [the trader] to think differently about whether a buy or sell was a good idea." Although, as Liew explained, Deutsche Bank had a rule "where there should be only one person active in the market," and that person would be referred to as the "book runner," there were times when Chanu and Vorley placed opposite orders (for example, a sell order placed to facilitate a buy order, and vice versa) in violation of this rule. The rule was intended to avoid "different people placing orders that might confuse each other." If, however, a trader is "the book runner and [the trader's] colleagues are aware that [they are] selling something, and if [the trader] see[s] them buying ... and especially if they don't talk to [the trader] about a trade and they're just placing orders very quickly and cancelling, [the trader] has very good reason to believe that those orders placed by them were to assist [the book running trader] buying or selling rather than genuine intent."
The government also presented evidence of Chanu and Vorley's trading patterns and resultant "fill ratios" in an attempt to align their record with the description of spoofing. A "[f]ill ratio is the ratio of the quantity that is filled divided by the quantity that is submitted." Looking to Chanu and Vorley's relative fill ratios, "the fill ratio for the iceberg orders tend[ed] to be high, close to 90 percent, whereas the fill ratios of the visible orders tend[ed] to be quite lower, .2 percent."
The traders communicated amongst themselves via electronic chat. These included Vorley saying "UBS and this spo[o]fing is annoying me ... it[']s illegal for a start" and Chanu applauding another trader for tricking the algorithm.
Overall, although the trading mechanics are quite complex, the defendants' actual actions are not in dispute. The focus here is on the interaction between the defendants' actions and the conduct prohibited by relevant criminal statutes.
Defendants were charged with conspiracy to commit wire fraud affecting a financial institution under 18 U.S.C. § 1343 ; on appeal, however, they argue any trading conduct akin to "manual spoofing" was not criminal prior to the Dodd-Frank Wall Street Reform and Consumer Protection Act, Pub. L. No. 111-203, 124 Stat. 1376 (2010). Although the outcome of this appeal turns solely on the wire fraud statute, a brief overview of both statutes helps situate the parties' arguments.
First, and of primary relevance, the federal wire fraud statute was enacted back in 1952. 18 U.S.C. § 1343. Applicable to fraud by wire, radio, or television, the statute states:
Whoever, having devised or intending to devise any scheme or artifice to defraud, or for obtaining money or property by means of false or fraudulent pretenses, representations, or promises, transmits or causes to be transmitted by means of wire, radio, or television communication in interstate or foreign commerce, any writings, signs, signals, pictures, or sounds for the purpose of executing such scheme or...
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